The naira exchange imbroglio

By 

Prof. Eghosa Osagie

IN the early 1980s, conservative politicians were elected to power in the United States, the United Kingdom and other leading countries of the West. At the end of the 1980s, the Soviet Union collapsed in the course of trying to copy the political and economic systems of the West. The demise of the Society Union left the United States as the sole super-power whose ability to influence global affairs was virtually unchallenged. As a result of these developments, Western Government succeeded in influencing the international Financial Institutions to formulate market-oriented structural adjustment programmes as basic economic policy framework for developing African countries experiencing economic difficulties. They also played a decisive role in determining the contents of the Uruguay Round Agreement which vastly liberalised international transactions in goods, services and capital.

What, we may ask, is the relationship between these developments in international relations and the fortunes of the naira, itself an ill-fated currency that was devalued 10 per cent in its first month of existence in 1972? The answer is that there is a close relationship between these developments and the subsequent sustained devaluation of the naira exchange rate since the 1990s, and in particular, during the highly unstable economic environment of the Nigerian Fourth Republic inaugurated in 1999.

A curiously ridiculous attitude to economic issues is observable in Nigeria. There is a wide-spread assumption that the country does not need professional economists to solve economic problems, that economists never develop consensus on any issue, that a "commonsensical" approach to solution of economic problems can be developed by non-economists, and that such policies should work. There is also a surprising sense of inferiority complex exhibited by officials in charge of economic matters in their uncritical acceptance of wrong economic policy dictation coming from multilateral agencies. Such policies, often based on unrealistic assumptions about the Nigerian economic landscape are sugar-coated with promises of inflows of development assistance which are not kept. Such policies invariably fail to achieve set out goals, resulting in greater hardship for the common people.

The 1980s were characterised by a welter of economic problems requiring urgent solutions. The inflation rate was on the rise, the rate of unemployment was rising, the federal budget was recording massive deficits running into billions of naira, and most important of all, balance-of-payments deficits persisted at levels that were clearly unsustainable. Before 1985, the Federal Government employed stabilisation policies which left the naira exchange rate fixed as instrument for solving economic problems. The sustained maintenance of fixed exchange rates was not due to sentiments about the inviolability of the national currency. Rather, knowledge about certain subtle aspects of the structure of the Nigerian economy was at the root of this approach to macroeconomic policy formulation. These aspects of economic structure are still in place; their disregard only leads to wrong policies, which compound current economic problems.

The introduction of the Structural Adjustment Programme (SAP) in 1986, for the first time in Nigerian economic history considered exchange rate devaluation as a key instrument in resolving the country's economic problems. SAP also introduced to the Nigerian psyche such terms as:

• privatisation;

• free market economy;

• down-sizing of the public sector;

• rationalisation of workers;

• liberalisation;

• private sector-led economy and

• deregulation.

   

  As a result of general outcry against SAP, it was diplomatically discontinued in the mid-1990s. However, in a strange twist of economic policy, the Fourth Republic returned to the key planks of SAP listed above without introducing a consistent economic policy framework. Government rather preferred to place excessive importance and propaganda exposure on privatisation and deregulation. A laissez faire approach was developed with regard to the naira exchange rate, which incidentally, is the most important relative price in the economy. Recent rapid depreciation of the naira awoke the presidency to the danger of allowing the bottom to fall off the value of the naira. It read the riot act to the Central Bank, which is turn called in the bankers for a harsh tongue-lashing. The Minister of Finance blamed the Central Bank for the collapse of the naira. Most surprisingly, the spokesman of the Central Bank argued that the CBN could no longer defend the naira, suggesting a more realistic exchange rate as N200 to one US dollar. This statement sent a clear signal to currency speculators that they could continue to speculate against the naira as long as the naira price of the dollar was lower than N200.

   

Lest we forget, let us identify the root causes of the economic problems already identified as early as 1982. These are:

• widespread over-invoicing of contracts in the public sector leading to large budget deficits;

   

• widespread over-invoicing of imports and under-invoicing of exports by the private sector, leading to massive balance-of-payments deficits;

   

• fraud in international banking transactions resulting in the accumulation of spurious external debts by the country;

   

• kleptocratic approach to governance;

   

• temporary collapse in the price of crude oil.

  It is instructive to observe that none of these root causes was effectively addressed by SAP. Why, in particular, has repeated and sustained devaluation of the naira exchange rate not turned the Nigerian economic around? More importantly why has devaluation been invariably followed by significant worsening of economic conditions?

  The reasons are to be found in the following:

   

• Devaluation in Nigeria wrongly assumed that the structure of the Nigerian economy was similar to those of the developed countries, disregarding the facts that Nigeria is heavily dependent on the petroleum sector which is not effectively linked to the other sectors.

• The assumption that free market economy produces optimal solutions is severely flawed by inadequate information about rational economic choices in the Nigerian economy; market failure; existence of inefficient monopolies in several sectors, including the foreign exchange market itself; the President's concern about the declining value of the naira and his resolve that he cannot sit in Aso Rock and observe helplessly as speculators destroy the naira; the organisation of the foreign exchange market consistently ensures that there is always an excess demand for foreign exchange which places permanent pressure on the naira, encouraging transactors to speculate against the naira without any fear of sustaining capital loss.

   

• The most important reason why continuous devaluation of the naira exchange rate has not revamped the Nigerian economy is the instability of the foreign exchange market. In technical terms, this is the occurrence of "wrong" slopes of the relevant supply and demand curves, all resulting from "wrong" attitudes of citizens to consumption of imports and production of exports. In the specific Nigerian case, it has been established by empirical analysis and simulation as far back as 1985 that an initial devaluation of the naira exchange rate, far from moving the market to equilibrium, rather moves it away from equilibrium. This is why each successive devaluation has necessitated further devaluation in the false belief that such policy action moves the system to market-clearing solutions. The lesson from this is clear. The Nigerian economy will continue to wallow in its current malaise until a realistic way is found for revaluing (raising the value of) the naira significantly and on a sustained basis until its value comes to values recorded in the mid-1980s. This is a hard fact for policy makers to accept, as it is an open admission of error sustained for 16 years.

   

  The way forward is clear to the open-minded, whose love for the country and its suffering people is greater than his/her self-interest. In the immediate period:

• the Federal Government should stop listening to foreign advice on exchange rates;

• the CBN should stop allowing its fear of "excess liquidity" to so becloud its monetary policy perspective as to impose on the economy an excessively tight interest rate regime which kills virtually all legitimate productive activities;

• the CBN should put in place an ingenious foreign exchange mechanism which penalises all speculators against the naira with a view to appreciating the naira as quickly as possible;

• if it is found that the fate of the naira has been "sealed," the country should "retire" the ill-fated naira with a new currency whose value should be guarded as a praetorian guard protects a national leader. Its value should be largely fixed, with limited bands around parity to take care of seasonal or temporary variations in economic fundamentals.

  The case made above is not new. It is well known to competent professional economists who have observed in pained silence the unnecessary destruction of the naira by wrong policies. Policy makers are also aware of these facts contained in expert analyses of economic problems. Whether we like it or not, we have to return to appropriate policies, strange as they may appear to those who have followed the wrong path for a long period. It is only when we do so that the Nigerian economy will experience a new lease of life.

   

November 2001